1. LIVE IN L.A. Your all access pass to complete Wealth Management Tax strategies for the owner manager Noel Perera Regional Vice President, Wealth Planning James Hutchinson Tax Partner, Miller Thomson

2. What you need to know when talking to a business owner As an advisor, understanding simple tax concepts provides that additional advantage required to demonstrate the value you bring to the table Recognizing or identifying simple or complex tax issues at the start of a conversation helps you to create an opportunity with clients or potential clients

3. General tax concepts you should know when dealing with owner managers 1.Should my client incorporate their business – benefits, costs and attribution 2.How can my client withdraw funds from the company and related tax consequences 3.My client heard about an estate freeze recently, how can I start the discussion 4.My client has received an offer to buy his business, what should the savvy advisor know

4. 1.Basic considerations in incorporating a business Benefits –Creditor or liability protection (piercing the corporate veil) –Tax deferral using the small business deduction –Possibility of splitting income with family members –Capital gains exemption –Considering taxation of investment income – possible?? Costs –Incorporation costs and ongoing costs to maintain corporation, including preparation of financial statements and tax returns –Deductibility of startup losses –Possible double taxation on death (unless certain planning is done)

5. Small Business Deduction – basic facts The general corporate tax rate is 25% (assuming a provincial tax rate of 10%) The small business tax rate is 16% on “active business carried on in Canada” for income under $500,000 (assuming a provincial tax rate of 5%) Income above $500,000 is taxed at the 25% tax rate Tax deferral until the profit is taken out of the company by way of dividends Profits taxed at 25% in the company are paid out as eligible dividends and taxed at a lower rate Profits taxed at 16% in the company are paid out as non- eligible dividends and taxed at a higher rate

6. Small Business Deduction – basic facts Associated corporations must share the SBD –Associated has an extended meaning, but generally a related group is included Beware of the “Personal Business Services” rules –If you are considered an incorporated employee then the SBD is denied Generally an active business includes any business that does not earn income from property except where there are more than five full time employees.

7. Taxation of investment income in a corporation Generally there is no significant advantage on investment income earned in a corporation Dividend income is generally subject to the same tax rate as it would be if it was earned personally –Canadian dividends are taxed at 33.33% (subject to refundability on payment of dividends) –Foreign dividends are taxed at 47% (subject to partial refundability on payment of dividends) Capital gains and interest are generally subject to the same tax rate - assuming you file a CDA election –Taxed at 47% and subject to partial refundability

8. Giving assets to spouse and kids Attribution rules for spouse –Income or loss attribution (net) –Capital gains and losses –Tax deferred transfer to spouse or spousal trust Attribution to kids –18 years –Income or loss attribution (net)

9. Kiddie tax rules Introduced in 2000 to prevent income splitting Minor children are subject to tax at the highest rate on “split income” Certain plans designed to create “capital gains” as opposed to income 2011 Federal Budget expanded the Kiddie Tax to capital gains realized on the disposition of shares to someone who was not dealing at “arm’s length”

10. 2.How can owner manager take money out of the company? Salary or bonus –It is deductible by the company (reduces corporate taxes), but included in income of the recipient –Subject to CPP, Payroll taxes, EHT etc –Ability to contribute to RRSP etc –Salary to family members must be reasonable in the circumstances

11. How can owner manager take money out of the company? Paid up Capital –What is it? –What is cost base of shares of a company? –Why is Paid up capital different from cost base? –Paid up capital can be drawn out tax free Loans to shareholders –Subject to interest benefit immediately when funds taken out from company –Must be included in the income of the shareholder in the year it was taken out if it remains outstanding after the second taxation year of the company

12. How can owner manager take money out of the company? Dividends and Capital Dividends (“CDA Account”) –Taxation of a dividends – subject to gross up and dividend tax credit –What is CDA Non-taxable portion of a capital gain and reduced by non- deductible portion of capital losses Life insurance proceeds Computation involves going back to the day the company was first incorporated Filing CDA election form, computation and directors resolution with CRA Best to file right after a large capital gain since it’s a point in time test

13. 3.Understanding an estate freeze Basics of an estate freeze – what are we trying to accomplish by freezing –Transfer future growth to next generation or spouse –Benefits of a freeze: Reduce tax on death Include family in the business and income splitting Enable income splitting (Capital gains exemption) –Drawback of a freeze: Giving up ownership to someone else Liability of other family members

14. Factors to consider Age and health of the owner Nature and size of the enterprise Prospects for future growth of the enterprise Current and future market conditions Interests of other family members or third parties Age and marital status of family members Cash flow Sufficiency of assets and standard of living Other assets and income available to the owner Exposure to creditors

15. Implementation of an estate freeze Variety of ways to implement an estate freeze –s. 85 rollover –s. 86 share reorganization –s. 51 share conversion Consider using a discretionary family trust Entire amount of future growth may be attributed to freeze beneficiaries, or freezor can retain some of the benefit Depends on individual facts and circumstances

16. Estate freeze Opco Founder Before Common Shares

17. Opco Family Trust New Common Shares Founder After 3 Trustees: Founder, spouse, independent trustee Beneficiaries: Spouse, children, grandchildren, corporate beneficiary Fixed-value Pref. shares Settlor: Parent or Sibling of Founder (no connection to trust) Estate freeze

18. Opco Family Trust New Common Shares Founder After 3 Trustees: Founder, spouse, independent trustee Beneficiaries: Spouse, children, grandchildren, corporate beneficiary Fixed-value Pref. shares Settlor: Parent or Sibling of Founder (no connection to trust) Founder Spouse and children Corporate Beneficiary Estate freeze

19. CRA audits of family trusts Recent audit activity on “care and maintenance” of family trusts Likely arose from use of Alberta trusts CRA auditing settlement of trust (settlement funds), implementation documentation for freezes and distributions from family trusts

20. Estate freeze It is possible to modify on estate freeze if client circumstances change - Re-freeze - Melt - Thaw

21. 4.Investor made an offer to buy my business What are they offering to buy, shares or assets? Tax consequences are very different in this context After tax cash to the shareholder (your client) will determine next steps May need additional negotiation on the price depending on the option chosen Generally, a vendor will prefer a share sale while a purchaser will prefer an asset sale

22. An asset sale … Tax consequences on selling each asset –Taxes payable in the company on sale of assets –If there are losses in the company it maybe a preferable solution, use of losses in the company to offset gains on sale –Allocating the purchase price between assets determines ultimate corporate tax liability –Allocate proceeds to assets with low cost base to reduce tax liability

23. An asset sale … –Taxation of the earn-out over a period of time –Taxation of non-competition agreement Detailed set of rules on how to deal with non-compete –Possible creation of CDA in the company for tax free distribution –Defer personal tax until funds taken out of the company –GST/HST, PST and land transfer tax are generally paid by the purchaser and can depress the purchase price

24. A share sale … Benefit from the lifetime $800,000 Qualified Small Business Corporation exemption Capital gains tax rate on amounts in excess of $800,000 –Worth approximately $185,000 to the vendor –Consider freeze with trust and multiplying CGE Taxation of an earnout where there is a share sale Taxation of non-compete where there is a share sale

25. Qualified small business corporation shares Only individuals can claim CGE –Does not apply if Holdco sells the shares of Opco Must be held for 24 months** 90% test –At the time of sale, the company must be a small business corporation; i.e., substantially all of the fair market value of the assets are attributable to assets that are used in an active business carried on primarily in Canada (look through rule)

26. Qualified small business corporation shares 50% test –Throughout the 24 months preceding the sale, the assets must have been assets used primarily in an active business carried on in Canada by the corporation Purification techniques can be used to meet the 50/90 test CNIL, ABIL & AMT, Old Age Security must be considered

27. Qualified Farm Property Similar rules for Qualified Farm Property Also includes shares of Family Farm Corporation and interest in Family Farm Partnership Different Test than QSBC

28. Questions?

29. Thank you For advisor use only This material is general in nature and subject to change without notice. Every effort has been made to compile the information from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the information contained herein, please seek professional advice based on your personal circumstances. Services and products may be provided by an Assante Advisor or through affiliated or non-affiliated third parties. Insurance products and services are provided through Assante Estate and Insurance Services Inc. Assante is an indirect, wholly-owned subsidiary of CI Financial Corp. (“CI”). The principal business of CI is the management, marketing, distribution and administration of mutual funds, segregated funds and other fee-earning investment products for Canadian investors through its wholly-owned subsidiary CI Investments Inc. If you invest in CI products, CI will, through its ownership of subsidiaries, earn ongoing asset management fees in accordance with applicable prospectus or other offering documents. © 2013 United Financial, a division of CI Private Counsel LP. All rights reserved.